FSA sells reporting system to LSE for £15m

Britain’s financial regulator has sold a deal-reporting system to the London Stock Exchange for £15m in a move that underscores how the Financial Services Authority is outsourcing its regulation.

The FSA confirmed on Monday that it had sold its Approved Reporting Mechanism (ARM) to the UK exchange. The information submitted to the ARM – which includes trade data, counterparty details and time of execution – feeds into the FSA early-warning system that flags up potential insider trading, known as Sabre. The FSA said it was keeping Sabre.

The deal also highlights how exchanges are looking to add other services beyond simply matching trades as profits from traditional equity share trading shrink in the face of competition from rival platforms. These include products like pre-trade risk management and “real time” market surveillance of share trades.

The LSE stressed that it was not taking on a regulatory role and will merely collect data through the ARM that will then be analysed by the FSA. Companies have to submit transaction reports under European Union rules known as Mifid and the rules are expected to be further tightened as part of the review of the directive. Publication of the proposals has been delayed until later this year.

The FSA has taken a heavy hand in the past to companies that have not submitted reports, or have completed them incorrectly. Barclays received a £2.5m fine in 2009 for not completing transaction reports properly.

This is not the first time that the FSA has looked to the private sector to do some of its leg work. Internal investigations known as Section 166 reports are undertaken by accountancy firms and lawyers when financial companies spot problems. These reports are then submitted to the FSA, which uses them in potential enforcement.

The number of Section 166s, which can cost as much as £4m, has surged since the financial crisis, with the regulator ordering 95 reports in the financial year ending in April, up from 88 in 2009-10. Before the financial crisis, fewer than two dozen were commissioned each year.

The UK regulator said it was confident enough to sell the business as there were seven other competitors, from third-party technology suppliers in the market offering deal-monitoring systems. “The FSA is confident that the ARM market is now sufficiently developed to enable firms to meet their reporting obligations to the FSA. The FSA therefore concluded that maintaining an ARM no longer formed part of its core role as a regulator,” it said.

David Lester, the LSE’s director of information services, said: “Customers will benefit from a significantly improved product and access to a wide range of value added solutions. This underlines our commitment to our customers in assisting them with all their execution and trade processing needs.”

Under Mifid, a firm must make public information about transactions in shares on regulated markets or multilateral trading facilities. Typically this must be done within three minutes of the transaction taking place.

The Mifid consultation document, published in December, suggested the reporting deadline be reduced to one minute while post-trade information, like clearing data, be published as soon as technically possible.

The £15m raised by the sale will go back into funds used by the FSA to monitor markets.